The world of trading is quite vast and even complicated to maneuver. Especially for those just starting in the industry, even after your countless research, online courses, and utilizing available marketing tools. It can still seem daunting to get into investing or trading The stock market, in particular, is incredibly extensive because of its popularity among investors. Finding the right stocks to invest in can be difficult. However, one factor that most investment strategists advise investors to pay attention to is a stock’s dividend yield.
You might be wondering what a dividend is. Simply put, a dividend is a cash or stock payments made by corporations to investors or shareholders. A dividend is your share of the corporation’s profits. You see, investors can generate a return off their stocks in two ways. One is when a stock’s price increases in value and/or when the company provides investors with dividends.
Make no mistake. Not all companies pay shareholders a dividend periodically. Companies are not required to provide investors with dividends. Not too long ago, dividends were not all too popular. And it only came back into the public’s favor in recent years.
Companies that generate a large profit have the choice of either using their money to purchase additional assets for the company. This is so they will be able to return a greater profit. Or, they can return profits to stockholders in the form of periodic dividends. With the latter choice, companies still keep a portion of the money but for additional assets. But, they will return a certain amount to the investors.
Not a bad thing
However, it is not entirely a bad thing for companies to withhold from paying dividends. For instance, around seven years ago, Apple Computer generated a lot of profits. But, they did not provide investors with dividends. By doing so, Apple was able to focus all of their profit on purchasing assets. These assets gave the company a major boost in the long run. Shareholders were able to enjoy the increase in the stock’s price per share. Ultimately, they were able to generate more earnings from their share. When Apple started paying dividends, people viewed it as the end of the company’s outrageously rapid growth.
Companies that are still growing typically do not pay dividends to fund their expansion, which investors prefer since they can capitalize on the rising stock price. On the other hand, older companies that do not see major price appreciation, they pay investors dividends. This will allow to encourage them to keep holding on to their stocks.
The great advantage and disadvantage
The main advantage of buying a stock in a company is that when that company profits, you profit as well. So, even without a dividend, as long as the stock’s price is steady, you can still get a return from your investment by selling your share.
While the availability of a dividend should not be the only factor one should look for in investing in a particular stock, a steady stream of dividends can be a decent source of additional income as long as you play your cards right.
In this article, we will discuss the advantages and disadvantages of dividends, and we’ll list the companies with the highest paying dividend stocks that you might be interested in.
Deconstructing the Dividend Yield
A dividend yield is how much income you earn about the price of a particular stock. It is the financial ratio that tells you how much a company pays out in dividends periodically relative to the stock’s share price. The dividend yield indicates how much cash flow you are earning for each dollar you invest in an equity position.
How to Compute
To calculate the dividend yield for a current year, you have to estimate using the previous year’s dividend yield. Or you can take the latest quarterly yield, multiply by 4, then divide by the current share price. This is known as the forward dividend yield, and you should be cautious in using this method since estimates of future dividend payments are intrinsically uncertain. You can also try examining the trailing dividend yield. You can get this by comparing dividend payments relative to the stock’s share price over the past 12 months. This way you will be able to get a better idea of how the company has performed in the past year.
Companies that pay a high dividend are either trying to attract more investors or are currently undervalued. Meanwhile, the companies that pay little to zero dividends might just be growing their capital or are currently overvalued. On the other hand, there are companies in certain well established and steady-earning industries such as banks and utilities. These kinds of companies have high dividend yields without necessarily being undervalued.
High paying dividend stocks can pay a high yield of 4%, and some companies even offer as high as 10%. It should be noted that not all high yield dividend stocks are stable. In some cases, dividend-paying companies drop the prices of their stock to entice investors in buying a share. This is only to reduce or cease to pay a dividend in the future. Even a seemingly stable company can spell trouble in the blink of an eye if unexpected issues suddenly pop up. For this reason, you, as a responsible and sensible investor, must not act on impulse. Do not buy a stock without doing extensive research.
What to Look for in Dividend Stocks
Investing in dividend-paying companies can open you up to a steady stream of extra income. However, if you are careless, you could end up investing in the wrong stock. After all, nowadays, a lot of companies do offer dividends. So choosing the ones that are the most stable and the most reliable can be a challenge.
Before we move on to the characteristics, you have to look for in your potential investment. You need to be aware that investing in dividend stocks should not be all about the yield.
Things to be Aware of
Beware of the dividend yield trap. The trap that most beginners fall into the majority of the time. This refers to the stocks that have unusually high dividends but for the wrong reasons. These stocks can be dangerous for your portfolio, and you should watch out for the tell-tale signs of this dividend yield trap. Obvious signs like the dividends are higher than the earnings, the company is in excessive debt, and problems with the company. There is no hundred percent guaranteed way to sniff out problematic high yielding dividend stock, but you can do some light digging and get a feel of the stock you plan on buying.
With that in mind, here are just a few characteristics to consider when choosing your dividend stocks.
Low Beta, Low Volatility
It is generally not a good idea to buy dividend stocks that are constantly rising and falling in price every day. Highly volatile stocks are not exactly dependable dividend stocks. They tend to be much riskier and could end up costing you your investment. It is wiser to stick to dividend stocks that have low volatility.
A stock’s volatility is represented by a metric known as beta. A beta compares a stock’s movements relative to the overall market or a certain stock index. An average stock has a beta of exactly 1 while a low volatility stock has a beta of less than 1. Stocks with higher than 1 betas have above-average to high volatility.
It is important to keep in mind that a low beta is not a concrete indicator that a stock is safe and stable. And a high beta does not mean that the stock is a major risk. Beta is only based on the historical average movements of a stock. And that it does not take into account other variables like news items, overall sector trends, and earnings reports. The beta is only a theoretical metric and could be a weak indicator of the stock’s actual performance.
You will need to look for companies that are not particularly vulnerable to many profit-destroying problems. There are plenty of reasons a company could choose to slice or maybe even eliminate its dividend. Check the company’s history of paying dividends. See if there have been dividend cuts or even missed payments in recent months or years. If the company has a good and consistent track record of paying dividends, the chances are that they are a solid enough business to invest in. And that they are likely to keep on paying dividends to their stockholders.
However, on the other end of the spectrum, just because a company is consistent in honoring their dividend payments. It does not necessarily mean that they will be able to do so forever. You will need to determine if the company’s dividend is sustainable in the long run.
If the company suffers from a lot of debt or if they are paying out too much of their earnings on dividend payments, there is a strong possibility that the business will not be able to support itself financially for the years to come. Typically, a company with a distinct competitive edge has better chances of allowing the company to sustain its market share in the future.
Ability to Grow
A dividend stock that has low volatility is consistent in paying dividend shares. Also, this is sustainable for the years to come. Which means, it is a good dividend stock to invest in. However, a stock that has all three characteristics, as well as a good track record of growth, is a great dividend stock that would be wise to invest in.
Beginners at investing in dividend stocks are advised to look for these four traits before purchasing stock in a company. Being able to discern which stock is advantageous is a skill unto itself. Always remain watchful of the background and history of the stocks you are investing in.
10 High Paying Dividend Stocks of 2018
Given today’s investing landscape, reliable high paying dividend stocks are now in demand. Amid the volatile market environment and rising interest rates, these stocks are extremely appealing to investors. As such, the list for the best dividend stocks is a long one. And we have compiled just 10 familiar stocks that you might be interested in. These stocks have all the necessary traits we listed above and have proven themselves dependable even in uncertain times.
Without further ado, here are ten high paying dividend stocks of 2018.
It should not come as a surprise to anyone that the largest telecommunications company of the U.S. made it to this list. After all, telecommunications companies are guaranteed to offer dividend payments. In this highly digital age of ours where everyone owns a phone and needs to access the Internet every day, telecom companies are more in demand than ever. This makes them great companies to invest in. All because customers are required to pay the service fee every month. Which means, it gives the company a steady stream of cash to pay dividends to investors.
AT&T is a particularly great example of this because of its size and influence. This telecom giant has a market value of $194.7 billion and a dividend yield of 6.3%. It is technically one of the highest dividend yields in the industry. Historically, AT&T is known for raising its dividend every year for the past 34 years. Not only that, but the telecom company is also still trying to generate growth through a proposed acquisition of Time Warner.
Similarly, Chevron, an integrated oil, and natural gas and geothermal energy company. This company also boasts of up to three decades of uninterrupted dividend growth. Even when Chevron suffered along with every other oil company a few years back because of the drop in oil prices. The company may have had to cut down on their spending, but it never slashed its dividend funds. That move was quite reassuring to investors since other companies would have decided to cut down on dividend or even stop paying them entirely.
Nowadays, the energy market appears to have stabilized, and oil prices have risen again. This may be bad news for consumers but is good news for companies and investors. Chevron now has a dividend yield of 3.5% and a market value of nearly $241 billion.
Well, this one is another unsurprising international. This multi-billion dollar company, Coca-Cola, has been known for high paying quarterly dividends is Coca-Cola. This company is a household name. And it has been increasing its dividend consistently for more than half a century. It has a market of more than $177 billion and a current dividend yield of 3.7%. Coca-Cola will quench any investor’s thirst for quarterly profit.
What is interesting and ingenious about this company is that even with the decline of the market for carbonated beverages in the US (most likely thanks to the push for healthier and environmentally-friendly alternatives), Coca-Cola has responded to the pushback by releasing new products like fruit juices and teas, even bottled waters, to keep consumers from leaving the brand. Coca-Cola has diversified its lineup of products, catering to just about anyone in the market, to remain relevant in the industry. It even owns large players in the beverage market like Powerade, Minute Maid, and Vitaminwater.
Coca-Cola releases more than just its namesake product now which makes it a highly stable dividend stock to invest in. World-renowned investor and one of the richest men in the world, Warren Buffett owns a large share of Coca-Cola Co. and has admitted on record that he will never sell his stocks of the beverage giant.
Emerson Electric manufactures a wide variety of industrial products and has been paying shareholders dividends since the mid-1950s. The company has consistently increased the annual payout for 61 years, making it a pretty reliable stock for investors.
Currently, Emerson Electric has a dividend yield of 2.8% and a market value of $44 billion. For a few years, the prolonged downturn in oil prices affected the company quite a bit, forcing it to cut back on spending. However, things have turned for the better for Emerson Electric this year. There’s been a strong demand worldwide which proves beneficial for Emerson and investors.
Federal Realty Investment Trust
This company was created in the 1960s to aid America’s real estate economy financially. Real Estate Investment Trusts or REITs (like the Federal Realty Investment Trust) are pass-through entities that do not have to pay federal income tax in exchange for paying out at least 90% of their taxable income as dividend payments. That is why REITs are the stock of choice for many looking for a steady source of income.
Federal Realty Investment Trust is a particularly stable REIT that currently has a 3.4% dividend yield. Its market value stands at around $8 billion. Federal Realty Investment owns real estate properties across twelve states. These include retail and mixed-use real estate too.
This company’s stable growth and the fact that it is a REIT make it a sound enough investment for just about anyone.
Johnson & Johnson
Another household name that is proven to be a handy dividend stock, Johnson & Johnson has increased their annual dividend payout for fifty-six years now. Although shares for the major health care company have been rather flat the past year, investors still enjoy stable dividend. The current dividend yield of this company is 2.7% with a market value of $328.9 billion.
Johnson & Johnson has been around for more than a century now, manufacturing over-the-counter consumer products that we have all grown up with like Band-Aids and baby powders, as well as medical devices used in surgeries. It is safe to say that Johnson & Johnson is a stable enough company thanks to their wide array of healthcare products.
Kimberly-Clark is best known for manufacturing consumer hygiene staples like Huggies baby diapers and Kleenex tissues. The company has been paying dividends for more than eighty years and has increased the annual payout for nearly fifty years. Kimberly-Clark is a steady dividend stock worth checking out.
The market value of Kimberly-Clark is $35.6 billion, and the current dividend yield is 3.9%. Besides a healthy dividend to drive total returns, Kimberly-Clark enjoys a slow but steady growth. Analysts expect the company to keep on growing at an average yearly rate of almost 7% for the next five years.
Investors are lovin’ it with McDonald’s reliable dividend. McDonald’s is the world largest hamburger chain and has been paying dividends since the 1970s. What’s more is that its dividend has increased every year since then. The current dividend yield stands at 2.5%.
McDonald’s is not only a hit in the U.S. but also in numerous countries worldwide. You can tell by its market value of $129.5 billion. Even though changing consumer tastes pose a huge risk, McDonald’s enjoys steady success year after year, topping Wall Street expectations in the first quarter of this year alone. One venture that has helped the burger giant is the inclusion of pricier menu items. Signature Recipe Burgers, more expensive than the classic McDonald’s burger, were loved by customers. Besides that, international sales – especially in the United Kingdom and Germany – have been pretty strong.
Overall, McDonald’s is a dividend stock that is fairly stable.
Procter & Gamble
No matter how much the economy dips and rises, products like detergent, toilet paper, and toothpaste will always be in demand. That is why Procter & Gamble, one of the world’s largest consumer products companies, is such a stable stock. Right now, its dividend yield is 4.0%, and its market value is $179.6 billion. Procter & Gamble has been paying stockholders a dividend since 1891 and has raised its dividend every year for 62 consecutive years.
Although the company also suffers during a recession, Procter & Gamble has played a vital role in helping fuel reliable dividend payments for more than a hundred years. It owns a lot of major brands such as Pampers diapers, Tide detergent, and Gillette razors to name a few.
Target might be second to Walmart in the discount retail industry, but it was seven years ahead of Walmart in paying investors a dividend. It is also quickly catching up in the e-commerce game. Target’s market value is $37.2 billion, and its current dividend yield is 3.6%. Analysts expect Target’s earnings per share to rise 12% in 2018 on revenue growth of 6%.
Investors can have confidence in Target’s dividend stock since it has been raising its payout every year since 1972.